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Accounting and Business

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Last Meeting June 9, 2014


What happened?
GTK and Leveling of Expectations
Retention and Grading Policy
Topic 1: The Accounting Profession and
its Development
The Accountancy Profession
What is an Accountant?
Career Opportunities
Professional Values and Ethics
The Accountancy Law of 2004

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Today June 11, 2014


Discussion of Topic 2: Accounting and
Business
Reason to study Accounting
What is Business? Types? Forms?
Fundamental Business Model
Accounting Defined
Fundamental Concepts of Accounting
Underlying Assumptions
The Financial Statements
The Basic Accounting Equation
The Account
Double-Entry System: Debit and Credit
of Accounting,
Account
Titlesof Accountancy
Used & by
its
Normal
FundamentalsTypical
Part 1 2014 College
Lowelle
Cielo Pacot,

Reason to study Accounting


People are living in an era of
accountability.
Pay our income taxes, house rentals,
telephone and light bills, salaries to our
house helpers and many others.
We forgot that all of these things we do
deals with accounting.
Provides information as basis for a
rational decisions.

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

What is Business?
Integrated set of activities
An organization or economic system
Goods and services are exchanged for
one another or for money
Requires some form of investment
Requires enough customers to whom its
output can be sold on a consistent basis
To make a profit

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Types of Business
Service Concern. Derives its income
from services rendered to clients.
Professional Services: Accountant,
Lawyers, Doctors. Non-professional
Services: Laundry Shop, Car Repair
Shop, Janitorial Services.
Merchandising or Trading Concern.
Buying and selling of products. Example:
Grocery Stores.
Manufacturing Concern. Buying raw
materials and supplies to be processed
and converting them to finished product.
Example:
Car
Fundamentals
of Accounting,
Part manufacturer.
1 2014 College of Accountancy by Lowelle Cielo Pacot,

Forms of Business
Sole Proprietorship. One owner
(proprietor)
Partnership. Two or more owners
(partners)
Corporation. Five to Fifteen
incorporators and Unlimited
shareholders.

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

The Fundamental Business Model


Capit
al
Busines
s
Owner

Sales

Cash

Banks
Retur
n

Operati
ng
Assets

Asse
t
Use

Product
s or
Service
s

Costs

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Accounting Defined

A service activity
To provide quantitative information
Financial in nature
About economic activities
Intended to be useful in making
economic decisions

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Fundamental Concepts
Entity. The transactions of different
entities should not be accounted for
together.
Periodicity. Entitys life can be
subdivided into equal time periods for
reporting purposes.
Stable Monetary Unit. Reasonable
unit of measure and that its purchasing
power is relatively stable.

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Underlying Assumptions
Accrual Basis. Transactions and events
are recognized when they occur and not
as cash is received or paid.
Going Concern. The enterprise will
continue in operation for the foreseeable
future.

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

The Financial Statements


To provide information about the
financial position, performance, and
changes in equity of an enterprise
Useful to wide range of users in making
economic decisions: Go.S.P.L.I.C.E.:
Government, Suppliers, Public, Lender,
Investors, Creditors, Employees
Elements: Assets, Liabilities, Equity,
Income and Expenses

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Elements of Financial Statements


Assets. How much has the entity owns?
Liabilities. How much has the entity
owes?
Equity. How much is left to the owner?
Income. How much has the entity
earned?
Expenses. How much has the entity
incurred?

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Definitions: Financial Position


Assets
Resources or properties
Controlled by the enterprise
Past events
Future economic benefits
Liabilities
Obligations
Transfer of economic benefits
Past transactions or events
Equity
Residual interest in the assets
After deducting all its liabilities
Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Definition: Performance
Income
Increases in economic benefits
In the form of inflows
Enhancements of assets or decrease of
liabilities
Results in increases in equity
Other than those contributions to equity
participants
Expenses
Deceases in economic benefits
In the form of outflows
Depletion of assets or incurrence of
liabilities
Results in decreases in equity

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

The Accounting Equation

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

More Exercises
1. At the beginning of the year, the assets of
CA Services were 360,000 and its owners
equity was 200,000. During the year,
assets increased by 120,000 and
liabilities by 20,000. What was the
owners equity at the end of the year?
2. At the beginning of the year, CGC Station
had liabilities of 100,000 and owners
equity of 96,000. If assets increased by
40,000 and liabilities decreased by
30,000, what was the owners equity at
the end of the year?
3. The liabilities of LL Company equal onethird of the total assets, the owners equity
Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

The Account
The basic summary device of
accounting.
T-account: its simplest form
Account Title
Left side or
Debit side

Right side or
Credit side

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Debits & Credits The DoubleEntry


System
The dual
effects of a business
transaction
A debit side entry must have a
corresponding credit side entry
Debits means Assets; Expenses
Credits means Liabilities; Owners
Equity; Income

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Typical Account Titles Used:


ASSETS
Current:
Cash
Notes Receivable
Accounts Receivable
Allowance for doubtful accounts
Inventories
Prepaid Expenses
Non-current:
Property, Plant, and Equipment:
Building, Land, Furniture & Fixtures,
Machinery & Equipment
Intangible Assets: Patent, Trademark,
Copyright, Franchise, Goodwill)
Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Typical Account Titles Used:


LIABILITIES
Current:
Accounts Payable
Notes Payable
Accrued Liabilities
Unearned Revenues
Non-current:
Mortgage Payable
Bonds Payable

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Typical Account Titles Used:


Owners
Equity
Capital: Owners
Investments, Profits &
Losses
Withdrawals

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Typical Account Titles Used:


Income
Service Income: already rendered
Sales: already delivered or sold
Interest Income
Rent Income

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Typical Account Titles Used:


Expenses
Cost of Sales

Salaries or Wages Expense


Utilities Expense: W.E.T.G.O.L
Rent Expense
Supplies Expense
Insurance Expense
Depreciation Expense
Uncollectible Accounts Expense

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Normal Balance
Refers to the side of the account debit
or credit where increases are recorded.
Assets: Debit balance
Liabilities: Credit balance
Owners Equity: Credit balance
Income: Credit balance
Expenses: Debit balance
Withdrawal: Debit balance
Contra-asset: Credit balance

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,

Questions?

Fundamentals of Accounting, Part 1 2014 College of Accountancy by Lowelle Cielo Pacot,